Nonprofit Accounting Fundamentals

A gift for a van is not the same cash as a gift you may spend on rent. Mix them and the lights stay on with money that had another job.

Nonprofit accounting basics exist so you can show that split. AccountingCoach says a nonprofit has no owners and cannot pay distributions to owners. The residual on the books is net assets. The mission is what those net assets are for.

What the books are proving

Nonprofit bookkeeping records where money came from and whether you used it as promised. Sage says the work is stewardship. A for-profit book asks whether the owners made a profit. A nonprofit book asks whether the resources advanced the mission.

AccountingCoach draws the same line. Businesses issue an income statement. Nonprofits issue a statement of activities. There is no owner’s equity. People sometimes think a nonprofit may not have revenue above expenses. AccountingCoach says the opposite. The extra revenue is how you absorb a surprise bill or a thin fundraising month or higher prices or more staff or a new piece of equipment. You cannot issue stock to fill the gap.

501(c)(3) accounting starts with a status that is not automatic. AccountingCoach says a nonprofit may apply to the IRS to be exempt from federal income tax. A second question is whether the donor may deduct the gift. Churches and schools and Red Cross chapters are AccountingCoach’s examples of groups where the gift can be a charitable deduction. Social organizations and chambers of commerce and college fraternities and sororities and amateur sports clubs and employee organizations can be exempt while the donor’s gift is not a charitable deduction. It might be a business expense. The detail is in IRS Publication 557.

Other taxes can remain. AccountingCoach says employees are likely subject to employment taxes even when the organization is exempt from income tax. Sales tax and real estate tax and other taxes depend on the state where you are formed or where you operate. Sage says state charitable-solicitation rules differ too. Confirm the stack that applies to you. This article does not list every state.

Restricted funds

Fund accounting for nonprofits is the habit of not pouring every dollar into one pile. Givebutter’s picture is labeled envelopes. Money in a youth-program envelope does not pay the electric bill. The formal version is a fund for each major restriction.

Restricted funds accounting shows up in two layers. AccountingCoach says the statement of financial position must show at least two classes. Those classes are net assets without donor restrictions and net assets with donor restrictions. The classes follow the donor’s limits at the time of the gift. If the donor names no limit, the cash is an asset and the revenue is unrestricted. That revenue increases net assets without donor restrictions. If the board then sets some of that money aside, AccountingCoach says it stays in the unrestricted class. The board can change its own label. The donor’s label is the one that binds you.

If the donor does set a limit, AccountingCoach says you record an asset and donor-restricted contribution revenue. That revenue increases net assets with donor restrictions. The example is James. He gives twenty thousand dollars that must buy a vehicle a program needs now. When the nonprofit buys the vehicle, the example uses a price of twenty-one thousand dollars. The purchase and the release of the restriction both change the books. The release is a reclassification. AccountingCoach shows it as a reduction in the restricted column and an increase in the unrestricted column.

Givebutter’s May 2026 guide describes three funds. Unrestricted money can cover operations and programs and administration and reserves. Temporarily restricted money is for a purpose or a time. Givebutter’s examples are a scholarship fund and a gift that must be used in a named fiscal year. Permanently restricted principal is the endowment case. You do not spend the principal. You may spend the investment earnings if the gift says so. Givebutter says FASB’s ASU 2016-14 renamed the external classes. Without donor restrictions covers the old unrestricted bucket. With donor restrictions covers the old temporary and permanent buckets. Givebutter says organizations keep the three-fund language inside the books. Givebutter treats that language as a fair way to think. Use two columns on the statement. Use as many funds as you need to keep a promise.

Givebutter walks through one month at a literacy group. The numbers are the guide’s illustration.

The cash can sit in one bank account. The funds do not. When the group spends eight thousand dollars on adult education, Givebutter applies that cost only to the restricted fund. The restricted balance falls from fifteen thousand dollars to seven thousand dollars. The eight thousand dollars that was spent for the grant’s purpose is then released. Skipping the release leaves the money looking locked after the work is done.

Sage adds a distinction that the fund name can hide. A restriction limits how or when you may use a gift. A condition can change when you are allowed to record the gift as revenue at all. Read the award letter before you book it. Store the letter and the pledge note and the donor’s email with the entry.

The statements

Nonprofit financial statements are a set, not a single profit number. AccountingCoach and Sage name the same core reports.

The statement of financial position is the balance sheet. It is a date. Assets and liabilities are ordered by how soon the asset becomes cash and how soon the liability must be paid. The equation AccountingCoach uses is assets equal liabilities plus net assets. Sage writes the same relationship as net assets equal assets minus liabilities. A positive number means you own more than you owe. Sage says liquidity and restrictions belong in that reading. Cash that must buy a van is committed. It is not the cash that covers Friday’s payroll.

The statement of activities is the period. It reports revenue and expense and the change in each net-asset class. AccountingCoach’s revenue list includes contributions and membership dues and program fees and fundraising events and grants and investment income and gains. Expenses fall into program functions and support functions. Support splits into management and general, and fundraising. If a manager spends part of the week raising money, AccountingCoach says you may need to move that share of salary. The example is 30 percent of the person’s time. The whole salary had been sitting in management. Thirty percent is the example. It is not your ratio.

The statement of functional expenses is the matrix. Rows are the type of cost. Columns are the function. AccountingCoach says FASB requires every nonprofit to show expenses by function and by nature in one place. That place can be a statement or the notes. Sage says the same analysis can sit in the statement of activities or the notes or its own statement.

The statement of cash flows has three sections. Operating. Investing. Financing. Investing is the purchase or sale of long-lived assets and long-term investments. Financing is borrowings and repayments. AccountingCoach says the report is hard to build and worth reading. Sage says it is how you see whether cash will cover payroll and suppliers.

Notes are part of the set. AccountingCoach says FASB Accounting Standards Codification Topic 958 calls for disclosures on liquidity and restrictions for creditors and donors and others.

Accrual is the method AccountingCoach describes for these statements. You report revenue in the period you earn it. That period can differ from the day the cash arrives. You report an expense in the period it matches the related revenue. If that match is unclear, use the period the item is used up. If you cannot tell, report the amount in the current period.

Sage says GAAP is the framework FASB maintains for nongovernmental nonprofits in the United States. Not every nonprofit is legally required to follow it. A grant or a lender or a board or an auditor may expect it. Governmental nonprofits are outside AccountingCoach’s introduction. If you are a government entity, this article does not cover your rules.

AccountingCoach’s shelter example is called Home4U. It shows why the statements and the checkbook diverge. The numbers are the lesson’s numbers.

• An unrestricted gift of ten thousand dollars arrives on January 31.
• On February 1 a two-thousand-dollar check pays a one-thousand-dollar security deposit and one thousand dollars of February rent. The deposit is an asset. The rent is an expense.
• A four-hundred-dollar utility deposit is an asset.
• An eight-thousand-dollar gift that must buy furniture goes into a money market account and into restricted revenue.
• February utilities are estimated at three hundred fifty dollars before the bill arrives. That is an accrual.
• March rent is one thousand dollars. The February utility bill matches the estimate. March utilities are estimated at three hundred dollars.
• Furniture costs eight thousand three hundred dollars. The restricted eight thousand dollars is part of that purchase.

The statement tells a fuller story than the check. A deposit stays an asset. A restricted gift stays committed.

The chart and the gift file

A nonprofit chart of accounts is the list of general-ledger titles. AccountingCoach organizes them as assets and liabilities and net assets. Revenues and gains come next. Expenses and losses follow. The count can run from thirty accounts to a thousand or more. It depends on how many programs you run and how much detail you need to steer the work. You might keep an account per bank account. You might keep many accounts under each major program and under fundraising and under management.

The statements and Form 990 show combined lines. The ledger keeps the detail. AccountingCoach says software can report revenue and expense by function and by the type of cost and by grant. Sage says the chart can sort revenue by funding source and by program and by donor restriction.

Nonprofit donation tracking is the record Sage lists for each gift and each grant. Source. Amount. Date. Purpose. Restriction status. Keep the grant agreement and the award letter and the pledge paper and the donor note with that entry. Reconcile the fundraising list to the ledger so the development staff and the books tell one story. Track the spending deadline and the balance left on the award. Givebutter says a fund per major restriction is enough for many small groups. Its advice is three to five funds. A fund for every check becomes a report no one can read. That range is Givebutter’s guidance. It is not a rule from the IRS.

Nonprofit recordkeeping includes the release. Givebutter says the release is a journal entry in the monthly close. If you skip it, restricted net assets stay high after the purpose is met. If you spend the restricted gift on rent, Givebutter says you can break the grant and put the next gift at risk and fail an audit question. Tight cash is a reason to use unrestricted reserves or a board-designated fund. Leave the restricted envelope in place.

Budgets sit on top of this file. AccountingCoach says a budget gets hard when grants and programs and functions overlap, and when next year’s gifts are not promised yet. Some groups use an account called resource development to make the budget balance, then revise it as gifts arrive. Sage says compare actual revenue and expense with the approved budget at least monthly. Write down why a line moved. A grant that arrives late is a different problem from a program that costs more to run. Sage says one overhead percentage is a weak universal target. Administration and fundraising can be what makes the program possible. Report them. Explain the ones that grew.

Form 990

Form 990 accounting is the annual information return, not a tax on your exempt purpose income. The title is Return of Organization Exempt From Income Tax. AccountingCoach says some exempt groups file Form 990 and some may file Form 990-EZ. Churches and some other nonprofits do not have to file. The return becomes public. AccountingCoach points readers to GuideStar to read what groups have filed.

IRS Publication 557 sets the size test for the short form. You may file Form 990 or Form 990-EZ if both of these are true. Gross receipts for the year are less than two hundred thousand dollars. Total assets at year-end are less than five hundred thousand dollars. Miss either test and you file Form 990.

A smaller group has a shorter duty. Publication 557 says an exempt organization that is not a private foundation submits Form 990-N when annual gross receipts are normally fifty thousand dollars or less. That duty applies when the group is not required to file a full return and is not excused from filing entirely. Form 990-N asks you to confirm that those receipts are normally at or under fifty thousand dollars. It is due by the 15th day of the fifth month after the tax year ends.

Forms 990 and 990-EZ and 990-PF share that same due date. A calendar-year group files by May 15 of the next year. If the date is a Saturday or a Sunday or a legal holiday, the next business day is the due date. Form 8868 gives an automatic six-month extension. Publication 557 says that automatic request does not need a signature or an explanation.

Private foundations file Form 990-PF. A section 501(c)(3) group that is not a private foundation and that files Form 990 or 990-EZ completes Schedule A. Schedule B reports certain contributors. Publication 557 says to report a significant new program and a change in your organizing documents.

Electronic filing is the default for recent years. Publication 557 says Form 990 and Form 990-EZ and Form 990-PF and Form 990-T must be filed electronically for tax years beginning after July 1 of 2019. Exceptions sit in the form instructions. If the form required an electronic file and you mailed paper, Publication 557 says the IRS does not treat the return as filed.

The penalty for silence is the exemption itself. Publication 557 says three consecutive missed years end the exemption by law. The miss is a failure to file Form 990 or Form 990-EZ or Form 990-PF. A missed Form 990-N counts the same way. The loss dates from the due date of the third missed return or notice. You reapply to get the status back. The IRS posts an auto-revocation list and updates it monthly.

A pending exemption application does not skip the return. Publication 557 says you file the 990-series return on the due date unless you are excused from the series. A small 501(c)(3) may be able to use Form 1023-EZ when assets are two hundred fifty thousand dollars or less and annual gross receipts are fifty thousand dollars or less. That application goes through Pay.gov. Those limits are the publication’s eligibility test. They are not a promise that every small group qualifies.

Sage says an audit is a separate question from Form 990. Not every nonprofit must have an independent audit. A state or a grant or a lender or your bylaws can require one. Sage says a nonfederal entity that spends one million dollars or more in federal awards in its fiscal year must have a single audit under federal Uniform Guidance. A program-specific audit can apply in place of that single audit. Confirm the threshold for your year before you plan the fee.

Habits that keep the promise

Sage’s control list is the practical side of the fund file.

• Split the jobs of approving a payment and recording it and reconciling it.
• Limit who can open the system.
• Keep a document and an approval for each payment.
• Reconcile the bank and the card every month.
• Keep a list of equipment.

A small staff cannot always split every job. Sage says a board member or the treasurer can review the work when one person must do more than one step.

A monthly pass can look like this.

1. Record each gift with the source and the date and the amount and the purpose and the restriction or the condition.
2. Put board-designated money in the unrestricted class and tag the purpose so the board can see it.
3. Code each expense by type and by function. Move salary when time was spent raising money.
4. Release restrictions you have met. Leave the ones you have not met.
5. Compare the month with the budget and write the reason for a large gap.
6. Reconcile the bank. Then check that the fund balances match what you are allowed to spend.
7. If a Form 990 is due, match the ledger to the size test in Publication 557 before you pick 990-N or 990-EZ or 990.

QuickBooks Online is one place to keep the gift and the fund and the function in the same record. The letter decides the restriction. You record what the letter says.

After the month is reconciled in QuickBooks Online, read the restricted balance before you pay a bill from the operating account. Nonprofit bookkeeping is that pause. The cash looks like one number. The promise is the number that matters.